UC Resources Answers Sprott’s Call to Action

UC Resources (TSXV:UC) has directly answered Eric Sprott's call to action. As we reported, Sprott, Chief Executive Officer and Chief Investment Officer of Sprott Asset Management, wrote a letter last November urging the world's top silver producers to invest in the metal they produce. UC Resources has responded by investing $1.5 million in the Sprott Physical Silver Trust (NYSE:PSLV,TSX:PHS.U).

Sprott said his letter was born out of "frustration with the paper market and doubts about the banking system."

On more than one occasion, Sprott has asserted that over a billion ounces of paper silver per day have been traded when only 700 million ounces are mined in a year. He says this happened last April when the silver price nearly hit $50 but retreated shortly after, and uses this occurrence to illustrate his belief that prices are being kept down by paper traders who are abusing the market.

As it currently stands, silver prices are set by the paper market, which Sprott said is not really connected to the physical market. He wants to put some of the pricing power into the hands of those playing in the physical arena. If miners were to invest in silver, Sprott argued, that could create a supply shortage that would benefit silver producers and their shareholders.

Sprott told George Tsiolis during an AGORACOM interview that mining shares won't go up when silver prices are down.

"If you let forces just determine the price of silver and it knocks your shares down, maybe you have to sit down and think 'what are we going to do to counteract this,'" he said.

Furthermore, Sprott described bank deposits as "risky" because account holders have to take on the risks of the banks. Since currently the reward for doing that is no interest, it adds to his argument that silver producers should be holding metal.

The call to action was issued in November. By December, Sprott told the Gold Report that he had received some positive response to his letter from major producers, saying "I know it's under consideration by a lot of people."

However, even he expressed surprise that it was a junior miner that first publicly responded to his call.

UC Resources explains Sprott investment

On February 7, UC Resources issued a statement saying that the company recently acquired $1.5 million of Sprott Physical Silver Trust for investment purposes.

The company provided a list of reasons for the decision. One was to improve return on present cash, since holding cash provides negative returns when inflation is adjusted. Another was to enhance shareholder value from further increases in the price of silver.

UC Resources also said this move is its way of responding to Sprott's call for precious metals companies to retain some production as savings.

In another inteview with George Tsiolis following the company's announcement, UC Resources' CEO and Director Gary Monaghan said, "we took [Sprott] literally. We actually believe in the business we're in. We believe in the silver market. And we believe that market is going to go up substantially this year."

Monaghan added, "it is a sign of faith to invest in the business we're in."

Like Sprott, he also noted that the banking system is not without risk, and offers low returns.

Todd Anthony, Head of Investor Relations, confirmed this action and said that First Majestic is very bullish on silver. He mentioned that Sprott is one of First Majestic's major investors, and the company is very supportive of him.

Getting into the fund was a very good investment and a relationship building measure. Sprott "was hoping to get ten percent of everybody's cash flow and $10 million dollars was about ten percent of cash," Anthony said.

If there are financial benefits or consequences involved, why aren't more silver producers taking action?

"I think most people in the industry are miners. They're not students of the silver market. That's the first major problem," Sprott said.

"I think miners are more thinking about rocks and gradings than what the price is," he went on to tell Tsiolis. "I think they should think about what the price is and why it where it is."